Gold and Silver Outlook in 2012

Lately we've been writing about the precious metals stocks. In particular
we believe the equities have made a multi year bottom and look ready for a
solid 2012 and 2013. Part of the reason is the action in the metals (Gold & Silver)
suggests an important bottom is in place and a rebound is underway. Based
on our work, we anticipate a slow but gradual rebound in both metals.

The current bottom in Gold bears similarities to what we saw in 2006. First
we show the bottom in 2006. Note the previous bull flag (blue), the double
bottom pattern and the final low occurring at the 300-day moving average.
Going forward, Gold rallied for five months and recovered over 75% of the
losses.

Note the similarities between the past and the present. Both corrections occurred
in five months, both occurred in a simple A-B-C pattern where A and C were
nearly a double bottom and both bottomed above the previous bull flag at the
300-day moving average. Thus, we would not be surprised to see Gold rebound
in a gradual fashion into the spring. It will be a while before a new high
but we do see Gold getting back to $1800 in the first half of this year.

While Silver corrected more than 40%, we believe it made a major bottom at
$26, which hosts a major confluence of support. First, note the 600-day moving
average, which provided important support in 2007, late 2009, 2010 and recently.
Secondly, $26 was the bottom in both January and on the spike low at the end
of September. Third, $25 was the key rebound peak after the crash in 1980
and has been a very important price point in the last bull market and this
bull market. Finally, the 50% retracement of the current bull market is $26.
Need I say more about the importance of the recent bottom occurring at $26?

Clearly, bubble callers have not consulted the latest commitment of traders
reports for Gold and Silver. In fact, I doubt most of them even know anything
about the COTs. The current structure of the COTs is very supportive to Gold
and Silver bulls. (Source: SentimenTrader.com).

First we look at Gold. Note that commercial short positions and speculative
long positions are at levels last seen in early 2009.

The COT structure for Silver is even more encouraging. Recently, the net commercial
short position in Silver was at an eight year low. The speculative long position
was at an eight year low and the small trader long position was at its lowest
point during the entire bull market.

Public opinion, also courtesy of SentimenTrader.com,
shows 58% bulls on Gold and 39% bulls on Silver. A few weeks ago these figures
were at multi-year lows. Let me ask you. Months after a peak in a bubble,
is the public cleaned out and pessimistic as the data shows for Gold and Silver?
No. In fact, its the public that remains optimistic and continues to buy after
the initial peak. That is hardly the case at present.

Simply put, there are only two conclusions a reasonable person can posit.
Either the bull market in precious metals is over and a small reflex rally
is coming or the bull market has made a major bottom. We believe the latter.
The bull market is far from over for obvious reasons. Considering the evidence
it seems highly likely that Gold and Silver have made major bottoms.

That being said, Gold and Silver have incurred technical damage and it would
be excessive to expect more than a gradual recovery. We believe the current
bottom in Gold is similar to the bottom in 2006. Gold recovered its losses
steadily but it would be nine months until the market began an impulsive advance
that resulted in new highs. Silver rallied back to its highs but in total
it was nearly eleven months before it began an impulsive advance to new highs.
Essentially, we expect these markets to be in consolidations for 2012. It
just so happens that we are starting from the low point which based on the
evidence, is likely to be a major low. Those with patience should accumulate
physical now. Meanwhile, those who are looking for growth and capital appreciation
should consider the mining stocks.